Liquidity Management in Fixed Income Portfolios

As a fixed income portfolio manager for an institutional investor, you are tasked with constructing a bond portfolio that meets both return objectives and liquidity needs. Given the current market conditions, where interest rates are expected to rise, and credit spreads are widening, liquidity management becomes paramount.

Your client has requested that the portfolio maintains a liquidity buffer to meet potential withdrawal requests while still providing adequate returns. You have access to a variety of bonds: government securities, corporate bonds, and municipal bonds.

Discuss the strategies you would employ to manage the liquidity of this portfolio effectively. Include considerations of bond selection, portfolio duration, and cash flow management. Address the challenges you anticipate in maintaining liquidity under different market conditions.